International Cat Speculators Since 2006

Posts tagged ‘Tax’

One of the frustrating things about trying to have a sensible debate about the correct level of taxation in this country, is that whenever an MP talks about reducing the tax burden, left wing MPs allege their only motivation is self interest and play on the politics of envy by saying they are only promoting it so they will get x dollars more a week themselves.

It is rather absurd to see them try this against Don Brash yesterday, alleging he supported tax cuts so he would get $168 more a week himself. Hello – this is the man who took a pay cut of around $500,000 a year to become an MP. I really don’t think he did it to try and then claw back $168 a week in exchange.

It’s a good story to illustrate the way we talk about tax. But I was thinking the other day, that it could be improved by the addition of some actual illustrations – graphs.

So here goes.

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Every day, ten men went to a restaurant for dinner. They always ordered the same meals, and the bill for their food always came to exactly $100.00. They did this day after day, year after year, without variation.

They did not divide the cost of the bill up equally among them, however. Since some of the men were more wealthy than others, they all agreed that an equal split would be unfair to those with less money. So, the men decided to pay the bill in precisely the same way we all pay our income taxes.
The first four men paid nothing at all. They ate for free. The fifth man paid $1.00; the sixth paid $3.00; the seventh paid $7.00; the eighth paid $12.00; the ninth paid $18.00. And the tenth man, who was by far the richest of them, paid exactly $59.00, which was most of the $100.00 bill. He didn’t mind, however, since he could afford to pay that amount. All was well. The ten men were happy with this arrangement, and they continued to eat at the restaurant every single day, enjoying their time together.

So what does that look like?

From that chart, you can see exactly how most of the food is being paid for by the richest man – something that happens in progressive tax systems all over the world.

Then one day… the owner of the restaurant threw them a curve. As they stood at the counter to pay their bill, he announced that he would reduce the cost of the meals for them. “Since you are all such great customers, and I am so appreciative of your business,” he said, “I am going to reduce the total bill for your meals by $20.00. From now on, your ten dinners will cost you only $80.00.”

The men were pleased. But the situation did present a problem. How were they to divvy up the savings among them? Obviously, they could not simply credit $2.00 (one-tenth of the $20.00 savings) to each of the ten men, since that would mean that the first four men would actually be getting paid $2.00 to eat! No good. It only seemed fair that the first four men, who paid nothing to begin with, should likewise not get any of this $20.00 refund. But still, there was a problem. If they now divided the $20.00 savings among the remaining six men, that would be $3.33 per man. If that amount were subtracted from each man’s payment, then the fifth man and sixth man, who had been paying $1.00 and $3.00 respectively, would then be getting paid to eat. That wouldn’t work, either. No, the solution to this problem required some ingenuity.

Just then, the restaurant owner, who had been listening to the discussion, interrupted. He offered a solution. He suggested that the fairest way to settle this dilemma would be to reduce each man’s bill by the same proportion as he had been paying in the first place. The owner walked over to his calculator and figured out the amounts each man should pay. And so it was agreed.

The fifth man, instead of paying $1.00, now paid nothing, just like the first four men had always done. The sixth man paid $2.00 (reduced from $3.00); the seventh paid $5.00 (reduced from $7.00); the eighth paid $9.00 (reduced from $12.00); the ninth paid $12.00 (reduced from $18.00). This left the tenth man with a bill of $52.00, instead of his previous bill of $59.00. The men paid their bill according to this arrangement, and they left the restaurant, satisfied.

Again, here’s the graph.

So the bill looks the same, but with everyone getting a cut. The 5th man now gets his small bill reduced to zero.
Outside the restaurant, however, the men began to compare their savings. The sixth man started complaining. “I only got one dollar out of the $20.00 savings. That’s not much,” he said. He pointed to the tenth man and declared, “And he got $7.00. What gives? That’s not fair. He’s rich. He doesn’t need the money. Why did he get $7.00, when I only got $1.00?”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that the rich guy got seven times more than I did! I surely have a much greater need for money the he does.”

“That’s true,” shouted the seventh man. “Why should he get back $7.00, when I got back only $2.00? That stinks! The wealthy get all the breaks. The rich just get richer.”

“Wait a minute!” yelled the first four men in unison. “We didn’t get anything at all. Not one stinking cent! The rich fellow, who drives here every day in a Lexus, got $7.00, and we all take public transit to this restaurant, and we got nothing at all. This system exploits the poor.” With that, the men became angry. “And I lost everything,” said one of the four. “My wife left me, my daughter is in the hospital, and I can’t get work. I could sure use a break. Instead, I got not one lousy penny of the $20.00, and I have to watch this guy who’s filthy rich take $7.00 of it! I won’t stand for it!”

The nine men surrounded the tenth. Their anger mounted as they continued to express their resentment at what they thought was a supreme injustice. Finally, they lost control of their senses. They beat up the tenth man. They left him bloody in the street, and they went home.

Here’s how those men were viewing the price reduction

They’re right – most of the price reduction went to the 10th man and 9th man. But notice that it’s a pie graph, talking about differences in the old and new proportions rather than the proportions themselves?

The next day, the tenth man did not show up for their regular dinner. The nine men sat down and ate without him. But when it came time to pay the bill, they discovered something: they were $52.00 short! Needless to say, that was the last time those men ever ate at that restaurant.

I wish I could say that these nine men learned a valuable lesson, that they came to understand the principle upon which a tax cut is based. But they didn’t. They were too stupid to understand.

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Here’s the graphs that they missed.

Proportion of the old bill to each man.

Proportion of the new bill to each man.

See that?The 10th man is actually paying a larger percentage of the bill with the new arrangement!

So let’s get this straight.

The reduction lead to no one paying more

The reduction reduced the bill to all who were paying

The bills of all the poorer men reduced absolutely and in proportion

The reduction moved proportionally more of the bill onto the richest man

There’s only one way to claim that the price cut, and our recent tax changes “benefited the rich”. That’s to talk about the tax cut

as though it were handing out money, rather than reducing a bill

as though the cut was a pie (proportional arrangement) itself, ignoring that it is a change to an existing proportional arrangement

but most importantly, it talks about a proportional cut to a proportional system in non-proportional terms.

That’s grossly dishonest.

By phrasing tax cuts in these terms, Labour and the left force more and more burden onto the richest man. They also demonize him as getting “more money” when taxes are cut across the board.

As the story illustrates, that’s very dangerous. It runs the sever risk that those being attacked will quite rationally decide that paying so much money to be the whipping-boy of society is stupid, and they will leave.

When that happens, we all end up worse off.

Now, I’m not saying here that we should give the rich a small tax burden. I’m simply saying that we should stop looking for ways to bash them, and start acknowledging that the vast majority of us are getting far more from the government than we pay in taxes, and we are bashing the people who make that possible.

they will conduct a review of the current business taxation regimes with the view of ensuring the system works to give better incentives for productivity gains and improved competitiveness with Australia.

This is political speak for “we’ll reduce the business tax rates to match Australia”.

Both Labour and United Future knew full well that this would end up bringing down the top personal tax rates too. I know this because I heard it explained as such by a United Future MP. You simply can’t have company rates lower than personal rates, because it opens a loophole for people to decrease their tax liability.

Had Labour been in power this term, there can be little doubt that they would be doing the same as National. Lucky for them, they’re not so they can now oppose the change that they started.

Second, while making a massive fuss about how the “poor” get hammered by this and that (much of which I have smypathy for – I was unimpressed with the idea to raise GST) the left forget the flip side of the coin – what the rich can do.

Hank Nothhaft is the CEO of Tessera, a firm in the field of semiconductor miniaturization. He shows me the vacant office parks and empty lots around his company’s San Jose factory. Silicon Valley, he observes, lost more than a quarter of its computer, microchip, and communications-equipment manufacturing jobs from 2001 to 2008, and Tessera proved no exception. The company has kept some of its assembly lines and industrial operations going here, but it now produces two-thirds of its nanotechnology chips in less expensive North Carolina and in various countries overseas, with China becoming the latest contender for a production facility. Just back from a trip there, Nothhaft says that he has been offered terms he “cannot decently refuse.” Using the Internet and videoconferencing, he can manage Tessera factories around the globe without leaving his San Jose office. “The business environment is becoming awful in California,” Nothhaft complains—just by moving his headquarters to Nevada, he’d save $5 million a year in taxes.

In our case, individuals move out of the country completely, or move their income to companies or trusts. By reducing the top tax rates, compliance becomes less profitable, and this means less money spent hiding income, and more spend productivity.

Also (and I keep forgetting to say this) tomorrow is the last day of the tax year.

Big woop, I know.

But, if you were to give your April donation tomorrow, you then get your 1/3 tax rebate back in a couple of weeks, rather than next April.

And while I’m at it, I must say “thanks” to the IRD. We may not have the best government, but our personal tax system works pretty well in my book. I’m always amazed at how quickly those guys get my charitable rebate back to me. As someone who looked at the American tax system in High School, I have no desire for us to adopt that particular aspect of American culture…

(Heh, and they thought King George was bad!)

I have a similar announcement to make… October-ish. Someone remind me, I never got around to it last year.

I usually buy the generic brand (they do all come from the same factory after all) and that’s currently around the $9 mark.

I do think however that raising GST is absolutely, unequivocally, stupid.

It gives the “National Hates The Poor” crowd a big, fat platformto stand on, and with all the tinkering that’s going to be put in to make sure that it doesn’t affect those on low incomes you might as well have just left it alone in the first place.

My preference is to cut out Labour’s more blatant “we’ve lots of money and want to return to power” bribes like Working for Families and interest free student loans and use that money to cut GST altogether. That would lead to a massive decrease in bureaucracy in both government and business.

Not that that’d be an easier sell…

Update: Well. Back at the supermarket today and cheese had shot up by $2! In fact I think Anchor is only just below the price there. We paid almost as much for 700g today as we did last week for 1kg.

Now, partly this is the recession. But the fact that they raised taxes on people who can easily afford to move doesn’t appear to have helped.

Y’know, isn’t it the left that’s always going on about how poor people get affected by this and that – yet they can’t work out that the rich won’t be affected by any given measure if they really don’t want to be.

Maryland couldn’t balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”

Here they said that taxing those over $60,000 would fix health. They must have a different definition of “fixed” to the rest of us.

One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.

Taxes change behaviour, this is so well know it’s not funny. Yet people seem to think they can crank things up “just a little more”.

The Maryland state revenue office says it’s “way too early” to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It’s easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: “Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it’s easy for them to change their residency.”

All of this means that the burden of paying for bloated government in Annapolis will fall on the middle class. Thanks to the futility of soaking the rich, these working families will now pay Mr. O’Malley’s “fair share.”

So the whole thing backfires, and the middle classes end up holding the baby.

Bizarre. Why can’t the government just let people make their own mistakes and leave it at that?

The Australian Food and Grocery Council, and now the federal opposition, have attacked the Rudd government’s preventive health taskforce, challenging its credibility over fat taxes and claiming Vegemite could be forced off the shelves because it is too salty.

Speaking in Brisbane on Wednesday, Mr Dutton said a fat tax on Vegemite would be ludicrous.

“We are calling on the Labor government to rule out this absurdity, to make sure that Australian families won’t have to pay a tax on Vegemite,” he said.

“They don’t need to be served up a menu from the Rudd government about what they need to eat and drink three meals a day.

“This is a government which has gone completely out of control in terms of nanny-state government and they need to make sure they rule out this tax on Vegemite.”

There are times when the Maori Party will have to choose between backing the interests of the Maori working class or the interests of the Maori business elite. A common Maori identity is no use when one side wants a pay rise and the other wants to keep its profits; when one side wants a top-bracket tax cut and the other wants better public health and education.

As if a top-bracket tax cut better public health and education are in conflict!

Cuts to the top tax bracket can often lead to higher tax takes, as they encourage people to declare their full income and to not move away and pay tax in other places.

Higher tax takes mean more money to spend on public health and education. Of course, more money doesn’t necessarily lead to better outcomes – Labour proved that.

Do these people even wonder why no one has raised tax on smokes recently?

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